|[February 04, 2013]
Fitch Rates Temecula Valley USD, CA's GOs 'AA-'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has assigned an 'AA-' rating to Temecula Valley Unified
School District, California's (the district) bonds as follows:
--$35 million general obligation (GO) bonds, 2012 election, series
The bonds will sell via negotiated sale the week of Feb. 11. Proceeds
will be used to fund technological infrastructure, building planning,
classroom updates, and other improvements.
The Rating Outlook is Stable.
The bonds are secured by an unlimited property tax on all taxable
property within the district.
ADEQUATE FINANCIAL OPERATIONS: The 'AA-' rating reflects the district's
satisfactory but declining general fund balance, projected rising
enrollment, years of prudent expenditure reductions, and moderate
remaining expenditure flexibility. Fitch expects the district to manage
its finances within its adequate fund balance policy.
FINANCIAL VULNERABILITIES REMAIN: The district's financial operations
are challenged by a weak liquidity position due to substantial state
funding deferrals, and high revenue concentration in state funding,
which has been weak and difficult to predict. However, revenue deferrals
and funding will improve in fiscal 2014 if the governor's budget is
adopted as proposed.
ABOVE-AVERAGE ECONOMY: The district's local economy, located mainly in
the city of Temecula, benefits from high wealth levels, unemployment
materially below regional and state levels, and ready access to three
large and diverse employment markets. However, the city experienced
rapid growth during the housing boom and its tax base was significantly
affected by the recession.
ADEQUATE DEBT PROFILE: The district's debt burden and principal
amortization is moderate, its other-post employment benefit (OPEB)
liability is minimal, tax rate assumptions are reasonable, and carrying
costs are manageable. However, the district is exposed to the poorly
funded CalSTRS pension system, debt amortization could weaken with
future planned issuances, and its capital plan is quite large, though
flexible as to timing.
SATISFACTORY MANAGEMENT PRACTICES: The management team is quite tenured
and has exhibited a willingness and ability to cut as necessary to
maintain an adequate financial cushion. Like all California schools, the
district is required to publish a large amount of forward-looking
financial data multiple times per year.
WHAT COULD TRIGGER A RATING ACTION
MATERIAL FUND BALANCE DRAWDOWNS: An actual or likely drawdown of the
district's unrestricted general fund balance to less than 6%, the lower
boundary of management's comfort zone, would result in negative rating
The district serves a population of 143,000 in the city of Temecula (the
city), surrounding cities, and unincorporated communities in
southwestern Riverside County. The city experienced rapid population
growth prior to the recession, fueled by its affordability and ready
access to the large and diverse employment markets of Los Angeles,
Orange (News - Alert) County, and San Diego. The city also has a significant tourism
draw because of its wineries and a large casino.
Median household income levels are high at 135%, 128% and 150% of city,
state, and national levels, respectively. October 2012 unemployment fell
to 8.2% from 9.3% the year prior. This compares favorably to the county
and state unemployment rates of 12% and 9.8%, respectively, but it is
above the nation's 7.5% level. The district's poverty rate is very low,
with just 20% of its students eligible for free or reduced price
lunches, compared to 59% of students in the county.
DIVERSE TAX BASE AFFECTED BY HOUSING MARKET WEAKNESS
The city's housing market was severely affected by the recession, with
Zillow house values falling from a 2005 peak of $501,000 to a low of
$253,000 in 2009. Despite the tax base's lack of maturity and the severe
home price decline, assessed value (AV) declined by a less dramatic 13%
in fiscal 2010 and a modest 1.4% decline the year after.
Home prices since 2009 have stabilized and year-over-year home prices in
December were up 10.4%. If these gains are maintained, AV growth could
occur in fiscal 2014 following very slight increases in the last two
fiscal years. AV growth could also benefit from a recent recovery in new
Fitch's concerns about AV volatility are mitigated by the state's
Proposition 98 funding formula. This formula mandates a minimum per
pupil level of district funding. To the extent that local tax base
contraction results in lost local property tax revenues, the state is
obligated to replace those revenues up to the minimum funding level.
However, state revenues have been subject to significant deferrals in
recent years that the state has only recently begun to pay back.
ADEQUATE FINANCIAL OPERATIONS
The district's financial operations are adequate. Revenues are highly
concentrated in Prop 98 revenues, as aremost California districts, and
have been subject to a prolonged period of weakness. Management
prudently has implemented significant expenditure reductions in
response, thus retaining a satisfactory financial cushion that
management nonetheless anticipates will be partially spent down over the
next few years to what Fitch considers a just-adequate level of 6%-10%
of expenditures from 10.9% at fiscal year end 2012.
Recent years' expenditure reductions have included teaching, management,
and classified staff reductions, furlough days, a school site closure,
increased class sizes, and an early retirement incentive program.
Despite these reductions, a moderate amount of expenditure flexibility
remains, including additional furlough days, categorical flexibility,
and potential salary rollbacks.
As with most districts that have implemented significant cuts in recent
years, political considerations could make it difficult to implement
some or all of these legal options.
FINANCIAL CUSHION LIKELY TO NARROW TO JUST ADEQUATE
Management anticipates that fiscal 2013 general fund operations will
result in an approximate $8 million fund balance drawdown, which would
lower the district's financial cushion to a just-adequate $15.5 million
(7.8%). This follows a $2.7 million drawdown in fiscal 2012.
The fiscal 2013 deficit reflects the district's decision to buy back 10
furlough days from its certificated and management groups (and the
assumption that its classified group will reach a similar agreement in
its pending negotiations). The furlough days would have saved $9 million
and were implemented at the start of the year under the assumption that
Proposition 30 would be rejected by voters in a state-wide November
election, triggering substantial mid-year funding reductions. Voters
subsequently approved Proposition 30, and no such funding reductions
To retain an adequately sized fund balance moving forward will require
closing future operational deficits now estimated at $8.8 million to
$13.8 million. However, these estimates do not incorporate recent
positive revenue proposals in the governor's budget and they assume that
labor concessions sunset in fiscal 2014.
GOVERNOR'S BUDGET POINTS TO POTENTIALLY HIGHER REVENUES
The governor's budget proposes a 5% increase of fiscal 2014 Proposition
98 funding, by far the district's largest funding source. Actual
funding, however, will not be determined until the state budget is
adopted around June. The district estimates that if the budget is passed
as proposed, district revenues would rise by $3 million in fiscal 2014
and $6 million in fiscal 2015.
The district's liquidity position is weak due to its dependence on state
funding, which has been subject to substantial intra-year and inter-year
deferrals. The district's fiscal 2012 quick ratio (cash divided by
current liabilities) is just 0.2x, down from 0.4x and 0.6x at fiscal
year ends 2011 and 2010, respectively. To date the district has managed
its cash flows by borrowing internally and by issuing tax revenue
anticipation notes (TRANs).
For fiscal 2013 management expects to issue $55 million in TRANs (a high
28% of estimated fiscal 2013 expenditures and transfers out). Proceeds
will be combined with $7.8 million of internal borrowable resources.
Liquidity pressures could begin easing in fiscal 2014 due to the
governor's proposal to pay down a portion of the state's funding
deferrals, increase programmatic funding, and also due to the Education
Protection Account (EPA) created under Proposition 30. Management has
yet to see how the EPA will work in practice, however.
SATISFACTORY MANAGEMENT PRACTICES
Management practices overall are satisfactory. Financial management is
quite tenured, and the district has implemented significant expenditure
reductions to maintain an adequate financial cushion. However, Fitch
views negatively the district's decision to buy back furlough days in
fiscal 2013, and is concerned that potential increased funding levels
beginning in fiscal 2014 could be absorbed by rising labor costs.
The district is subject to AB1200 financial reporting procedures, as are
all California districts. These procedures require the district to
perform multi-year financial forecasting multiple times per year and to
comment on over 30 potential financial red flags. The district's budgets
and two interim reports must be reviewed and certified internally and
also by the county office of education. Qualified or Negative
certifications may lead to various levels of external financial
intervention. Fitch views these statewide school procedures as strong.
ADEQUATE DEBT PROFILE, LARGE CAPITAL PLAN
The district's overall debt profile is adequate. Its debt burden is
moderate at $3,953 per capita (3.4% of AV), and likely to remain so even
after it exhausts its large $165 million GO authorization. Debt
currently amortizes at a moderate rate, with 29% and 42% of principal
retiring over five and 10 years, respectively (assuming final accreted
interest is treated as principal).
This issuance is composed of current interest bonds (51% of par),
callable capital appreciation bonds (9%), and convertible capital
appreciation bonds (CCABS) (40%).
The CCABs automatically convert to current interest bonds at fixed dates
at a predetermined interest rate. The CABs and CCABS slow total debt
amortization. Expected additional debt could further slow amortization,
especially if the district continues to issue capital appreciation bonds
(CABs). The district has not yet determined the structure of the
remaining GO authorization.
The district's capital improvement master plan is very large at $325
million and includes new schools, renovations to existing schools, and
other projects. The district plans to fund these improvements with GO
issuances, community facility district financings, and state and federal
funding. The plan is characterized as quite flexible and can move
forward on the basis of funding availability.
MINIMAL OPEB LIABILITY, BUT CALSTRS PRESSURES LOOM
The district's other post-employment benefits (OPEB) liability is
minimal, as the plan is open to a very small group of managers. However,
the district participates in the poorly funded CalSTRS pension system,
as do all schools in the state. Although the district is paying 100% of
its required rate, in fiscal 2011 system contributions were equal to
just 46.7% of the actuarially required rate.
CalSTRS contribution rates are set by statute and they have not been
increased to reflect the weak investment return environment over the
past several years. As a result, the system's Fitch-adjusted funded
ratio has fallen to a low 65.7% and future contribution rates likely
will need to rise substantially from current levels. It is unclear which
stakeholders would face increased contribution rates, and how such
increases would be implemented, but Fitch believes districts would be
likely to bear at least part of the burden.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, Underwriter.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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